The Wall Street Journal, via Big Picture, writes about one of the three rating agencies that helped bankers sell bundled crap as triple-A rated valuable bonds. Another piece explains that this scheme is still working and how a big investor is stills buying such crap with your money.
The rating:
[Moody’s, a] firm once known for a bookish culture began to focus on the market share that affected its own revenue and profit. The rating firm became willing, on occasion, to switch analysts if clients complained. An executive overseeing mortgage ratings went skydiving with a client. By the height of the mortgage-securities frenzy in 2006, Moody’s had pulled even with its largest competitor, rating nine out of every 10 dollars raised in these instruments. It gave many of the bonds its coveted triple-A rating.
…
Investors, many of whom relied on ratings to signal which securities
were safe to buy, have lost more than $100 billion in market value. The
credibility of the ratings system is in tatters as new downgrades of
mortgage securities come almost weekly.
Moody’s, Standard & Poor and Fitch essentially took bribes from investment banks. They rated bonds issued by the big bank’s shady off-balance-sheet vehicles much higher than they deserved to be rated.
A lot of pension funds now own such misrated bonds and are losing money on them.
So one should think that by now no one will trusts those ratings anymore. Not so.
There are still banks out there who try this three card monte trick and they even find investors who fall for the scheme. One of these people goes buy the name of Ben Bernanke and acts, somewhat, on behalf of the people.
Reuters reading from another WSJ piece:
According to the Journal, Lehman [Brothers Holdings Inc] transferred $2.8 billion in loans that included some risky leveraged buyout debt into a new investment entity called Freedom.
Freedom then issued debt securities backed by the loans, and $2.26 billion of the securities got investment-grade credit rankings from Moody’s and Standard & Poor’s, according to the report.
The bank used some of those securities as collateral for a low-interest, short-term cash loan from the Federal Reserve, the Journal said, citing people familiar with the matter.
When the Fed makes profits, as it usually does, most of those go to the government and help to pay for the general budget. When one day the Fed will make a big loss on one of these loans backed by crap-bond collateral, it will send less profit to the government and higher taxes will have to make up for the difference.
Ben Bernanke will then explain to Congress that it was impossible to know that a triple-A rated bond could be worth less than its face value. "Who could have known that Moody’s …"